Misgivings about the gold rally


Something is amiss when a 375-point stock market advance seems suspect. But that’s the feeling after Thursday’s massive stock rally. Such pessimism often presages another rally simply because investor sentiment has gotten too negative. But the recent surge higher seems unsustainable when compared with the whirlwinds of concern surrounding the market. It is difficult to be anything but cautious. Buying bearish puts on the iShares Russell 2000 (ticker: IWM) that expire early next year seems more prudent than just trading off the back of hedge-fund managers desperately trying to catch up with benchmark indexes, favorable seasonal trends, corporate earnings and the news that Europe’s financial crisis is apparently now under control. Main Street and Wall Street usually disagree, but their worries currently sound eerily similar. That in itself is cause for concern. On Main Street, stories have begun to reappear about doctors declaring bankruptcy, or unable to access bank financing. Dentists claim patients are opting to have teeth pulled for a few hundred dollars because they can’t afford crowns that cost several times that. And stock brokers have noted an uptick in client complaints about fees, more account closing and a general reduction in risk-taking. Sounds more like the beginning of 2008’s financial crisis than the start of a major rally. On Wall Street, the fourth year of a global financial crisis has many of the well-heeled nervous. A hedge-fund manager recently told me his neighbors in Summit, N.J., an affluent Manhattan bedroom community, are teetering on the edge of insolvency. Their $20,000 to $30,000 in monthly expenses consumes all their income. Another money manager carries around a picture of gold bars he stores in UBS’s vaults in Zurich. There’s even talk again of bankers buying guns. Preparing for civil unrest would be easy to dismiss, if buying guns and gold were not increasingly mentioned by serious people. By some accounts gold would be $2,000 an ounce if not for John Paulson, the hedge-fund manager. He is believed to be selling gold to cover investor redemptions because his funds have stumbled. At a recent gathering of the World Federation of Exchanges in Johannesburg, major stock and derivatives exchange leaders privately expressed concern about the inability of regulators to address the global financial crisis’ fallout. Of course, they mostly excused themselves from responsibility. Consider credit-default swaps that are used to insure corporate debt. They adversely influence stock and options trading because the slightest trading activity or price changes are viewed as a sign that bad things might happen to a corporation. The swaps influence bearish put volatility and invariably pressure stock prices, but the swaps, which have no position limits, are effectively ignored because exchanges do not want to anger banks that make big money in unregulated OTC derivatives like a CDS. The public suffers because banks are increasingly business partners, customers and shareholders of for-profit exchanges. Politicians are similarly encumbered. One exchange leader said the bourses are only required to regulate their own markets — not the overall market. That’s the job of the Securities and Exchange Commission and the senators and representatives who oversee the agency and the banks. Yet, exchange leaders admit the financial markets are too complex to be understood by the SEC and politicians. These grim views should make you uneasy. If you want comfort, buy gold bars and coins, a 12-gauge pump shotgun, and slightly out-of-the-money puts on the iShares Russell 2000 Index that expire in February or April. Two to four months into the new year should be about when the current bullish mood wears off and the sclerotic global economy again slows the financial markets. Hopefully, this skepticism is misplaced and you are left with a fine story about how, in the fourth year of a global financial crisis, the world’s problems seemed intractable just before the hardships ended.